You may have read in the news that the Kansas Department of Revenue, or KDOR, had notified online retailers that state officials expected them to register and begin collecting and remitting sales tax on sales to Kansas residents.
The issue of the collection of online sales taxes has been roiling the Statehouse since at least 2003 when the legislature passed a bill giving KDOR the authority to collect sales tax from out-of-state retailers. The law has not been enforced until now because U.S. Supreme Court decisions had found that the states could not do so.
Since 1992, the Supreme Court decision in Quill v North Dakota established that sales taxes could only be required if the retailer had a physical nexus in the state. In other words, a state could require LL Bean to collect online sales taxes for the state only if LL Bean had a store in the state. But now a 2018 Supreme Court case, South Dakota v Wayfair, has changed all that. The Court has now determined that a physical nexus is not necessary; the retailers have an “economic” nexus in the state – essentially just sales in the state.
Many states have been enacting a sales threshold under which online retailers would be required to collect and remit sales tax to the state. South Dakota, for example, set a threshold of $100,000 in sales or 200 transactions before the requirement applied to the retailer. But the Supreme Court case did not set such a requirement.
The Kansas legislature in the 2019 session passed a bill that would have set such a threshold for Kansas but the bill was vetoed by Governor Laura Kelly because it also included large tax cuts for corporations which would have harmed the state’s ability to fund the newly-passed school finance bill. Had the threshold bill been stand-alone legislation, she would likely have signed it but conservatives in the legislature apparently decided the only way to get their massive corporate tax cuts passed was to tie the two issues into one bill.
Since the Wayfair case did not establish a test for when retailers could be required to collect and remit sales tax, the KDOR notified online retailers that the state would now begin enforcing the 2003 law. This law was established primarily to protect in-state retailers. Making in-state retailers collect the sales tax while out-of-state retailers do not, creates an economic disadvantage for Kansas-owned businesses. The KDOR decision, based on the 2003 law and now allowed under the Wayfair decision, evens the playing field for in-state retailers.
Conservative, anti-Kelly legislators called for an Attorney General’s opinion as to whether or not the Governor and the Secretary of Revenue had overstepped their authority despite the fact that they voted FOR the bill establishing thresholds and allegedly support “leveling the playing field” for in-state retailers. Kansas Attorney General Derek Schmidt recently issued his opinion, siding with the conservative legislators. Governor Kelly has released a response to the AG’s opinion in which she says, “Department of Revenue believes that enforcing the existing law is legally required and that it levels the playing field for Kansas businesses. The Attorney General’s opinion stretches legal analysis in a way that puts Kansas businesses at a disadvantage.” The full response follows.
Response to the AG’s Opinion on Notice 19-04 and the Wayfair Decision
As you may have seen, the Attorney General issued an opinion in regard to the Kansas Department of Revenue’s Notice 19-04, which notified out-of-state businesses that the department intended to begin to collect sales tax on online purchases, as required by Kansas law and allowed under federal law in response to the Wayfair decision from the U.S. Supreme Court.
The Wayfair opinion changed the landscape for collecting these taxes in the United States. Department of Revenue believes that enforcing the existing law is legally required and that it levels the playing field for Kansas businesses. The Attorney General’s opinion stretches legal analysis in a way that puts Kansas businesses at a disadvantage.
The legal decision and details
Kansas law gave the Department of Revenue the authority to collect sales tax from out-of-state retailers in 2003, under the restriction that those collections be allowed by federal law.
The U.S. Supreme Court had previously determined that it was a violation of the federal constitution to tax such retailers, so Kansas didn’t enforce the tax, even though it was in statute.
Last year, the U.S. Supreme Court handed down a decision in South Dakota v Wayfair that established the right of states to collect sales tax on out-of-state retailers.
Because of that decision, the restriction in Kansas law was removed and the department was required to begin to enforce Kansas law as written, even if the Kansas law doesn’t have the details in it that South Dakota’s does.
What it means for Kansas
For the past 29 years there has been overwhelming support for tax fairness between out-of-state retailers and Kansas businesses.
Since the Wayfair decision, more than 3,200 out-of-state businesses have registered with the state to collect and pay taxes due and owed; 588 of those out-of-state businesses have registered since August 1, when the notice was published.
The KDOR notice simply implements law that has overwhelmingly passed: collecting tax that is owed and leveling the playing field between in-state and out-of-state retailers.
Wayfair did not establish a minimum threshold. Some states are reconsidering their decision to implement thresholds.